Insider Trading (cont.)

As predicted, the business press is trotting out the expected comments on the brewing insider trading scandal. I may have been a bit imprecise with my three categories, but they pretty well cover the water front.

One view that I missed entirely is the unrepentant one voiced very clearly by John Carney from CNBC http://finance.yahoo.com/news/The-SECs-Absurd-War-Against-cnbc-1773887254.html?x=0. The fancy name for this point of view is the Efficient Market Hypothesis (“EMH”).

EMH says there shouldn’t be ANY rules against insider trading because the market should be totally transparent, and only by letting insiders trade freely in a stock will the market accurately reflect all the available information on that stock. Let me guess, this guy just loves Ayn Rand and thinks the Atlas Shrugged is a great piece of literature. I thought this kind of nonsense went out with Greenspan’s public recanting. That was where former Fed Chair Alan Greenspan owned up to his profoundly naive belief that markets would regulate themselves. At least Greenspan had the balls to look at the wreckage his outlook helped create and say that he was terribly wrong.

The only way someone can continue to believe this nonsense is that they’re just naive. Carney read this theory, probably in business school, and bought it hook, line and sinker. It makes sense, in a vacuum, especially to young people and people with little or no real world experience. If insiders have information others don’t they’ll use it to their advantage and to your disadvantage. I don’t think the owners of a business would like it if their employees started buying stock based on a positive development the company wanted to keep under wraps until a specific point in the future. When you hear this theory or arguments that sound like it, just laugh at the proponent. They’re wrong. Tell them Alan Greenspan had the same idea and look where that got us.

Personally, I have a comic vision of guys like Carney and Greenspan being conned into believing this nonsense by people with real money who are just using them as shills.

So let’s dismiss Carney. He’s a shill. But remember, this is an outlook that ruled the business press roost for years, and won’t go away quietly.

Todd Harrison brings another perspective. Todd says it’s just terrible that people are viewing big finance as a bunch of thieves. He even pats himself on the back for not being acrimonious as he throws in a link comparing people who disagree with him to the idiotic supermodel in the movie Zoolander. He also casts those who disagree with him as conspiracy theorists. At the end of his article, Todd tells us that hedge funds are essential and that without them (if this makes sense to anyone, please send me an email explaining it) “the specter of free market capitalism will be forced to endure an entirely more profound pathway.”

Does profound mean bad? Will the specter be forced to endure such profundity, or will capitalism itself be forced to endure it? Even your humble decoder is left wondering what this means.

Calling these people to the carpet doesn’t make you a conspiracy theorist. Pointing out that the hedge funds have structural advantages that ordinary investors can’t compete with isn’t bad or wrong. Todd’s made good money in the business and is paid to defend it. That said, I agree with him that there aren’t any conspiracies at work here; that most people in this industry haven’t broken the law; and that people shouldn’t be found guilty before a trial.

The big press will probably have stories over the holiday weekend. There’s a lot of digging to do and no one wants to go off half-cocked on this one. There’s a LOT of life left in this one! I think the “overzealous prosecutor” angle will get some play, but less than in the past, given Bernie Madoff et. al. I’m still hoping for some “this stuff is too complicated” stories.

Stay tuned!